Homeowners concerned about their monthly mortgage payment should give serious consideration to a loan modification. Though the money owed is added to the loan balance after a loan modification is granted, the interest rate can be reduced. Furthermore, a home loan modification can extend the loan’s length and possibly even decrease the monthly mortgage payment. However, there is also the chance for a loan modification to spur a payment hike if your are egregiously delinquent. In general, the typical home loan lenders mandate that at least two payments be missed before a loan modification can be considered.
The Loan Modification Process
The Home Affordable Modification Program is by far the most popular modification program. However, varying modifications are available through private lenders. The lending party ultimately determines candidate eligibility for home loan modifications. Fill out the loan modification paperwork, listing all sources of income, debt and expenses. The lending party will also check your credit report to determine if there is any debt you might have overlooked when filling out the loan modification application. Your debt-to-income ratio will take a hit even if an old account is still listed in collection. The lending institution might also request your most recent pay stubs, tax returns and W-2 forms. All in all, the loan modification process will likely take upwards of 90 days.
Common Loan Modification Options
Certain types of home loan modifications are better than others. Some lenders offer a limited number of loan modification options while others have a plethora to choose from. A principal reduction is one of the more common loan modification options. In this modification, the lender eliminates some of the debt, ensuring you can repay less than the amount originally borrowed. The monthly payments are recalculated with the lower balance in mind, resulting in a lower monthly bill. Though lending parties are usually hesitant to decrease loan principals, it is possible in the right situation. Just be sure to consult with a tax specialist to determine if you will owe taxes on any debt forgiven as a result of the loan modification.
Home loan modifications can also lower the interest rate and subsequently decreased the monthly payments. Though such rate reductions are sometimes temporary, they will still help keep your payments under control for the time being. Some loans can be modified with extended terms. A long-term loan provides more years to repay the debt. The additional time allows for lower monthly payments. Also known as re-amortization, this approach has the potential to save you money yet it can also result in elevated interest costs as interest is paid across that many more months.
Take Your Time Before Making a Decision
If the lending party approves your application for a home loan modification, do not automatically accept it. Take some time to review the terms of the offer before making a decision. Be especially hesitant to accept a loan modification if it increases your monthly payment. It might be better to take another route such as a short sale. In this type of sale, the lender agrees to take less than the loan’s balance in a sale. So do not rush into making a decision about your home loan. Review all loan modification options, proceed carefully and you just might save a bundle of money.